The growth of debt at a faster rate of GDP, even with the current lower interest costs, will will eventually cause debt service to crowd out normal government operating costs and there will be a fiscal crisis at some point (or a monetization of the debt). These welfare state models do not work well especially when the demographics (as is the case in Poland) are against you. Time for new thinking beyond constitutional mandates on debt to gdp that will not work. An annual balanced budget is one idea. But of course that would require an electorate that is mature and responsible. Easy to always blame the politicians but we elect them!

7:03 pm October 7, 2010

Jan (aka Jasiek) wrote:

@WarsawRules

But, an austerity could also lower the revenue, aggravating the debt finance, when the government should make an active commitment to creating an economic structure that would eventually support an autonomous development of small and medium-sized businesses rather than big ones and thus a more likelihood of innovation thus new demand and potential growth. For the purpose, a through restructuring of the geographical structure is necessary, namely urban and inter-urban restructuring projects with de-motorisation, improvement of inner-urban infrastructure including water, sewage, gas, electricity, telephone line, high-speed internet, in-city commuter train network, etc. These development projects need the public finance, but not as much as to directly close the demand-supply gap to directly materialise a full employment. Naturally, debt finance to some extent is inevitable. On the contrary, a straightforward austerity, without the geographical restructuring, would not support small and medium-sized businesses but rather big businesses – domestic or foreign – by creating a harsher disinflationary pressure, with lower wages as a matter of course, in an economy A balanced policy always counts. It is how you spend and what you spend for that matter more. This is the very point that differentiates what you call the Austrian school from the Chicago school or freshwater ecnomics. If Messrs Rostowski and Tusk think of the current debt finance and fighting against red tape in this context I would personally support them. I wish if I could ask them.

3:57 pm October 8, 2010

WarsawRules wrote:

@Jan (aka Jasiek) Poland already went through hyperinflation. WIll this be round two? The debt growth is supported by the investment banks that only are interested in their placement fees. Of course the source of the problem is a lack of reform in ZUS and overall headcount in the government (not capital infrastructure projects).

Supporitng SME's? GIve me a break! I run several SMEs for many years in Poland and the only thing needed is LESS government red tape for normal labor costs and greater flexibility. You have to be crazy to employ workers on a standard work contract.

Deflationary pressure? Please go to the local food store. Inflation is undercounted in the governmsnt statistics. Real inflation in Warsaw is running at 5%+ compounded anually (counting food and energy).

More economic FREEDOM is needed to create jobs and a better overall quality of life. Government missallocates resources and usually destroys wealth.

8:13 pm October 8, 2010

Jan (aka Jasiek) wrote:

@WarsawRules

It seems to me that the rise of consumer price is due to the large capital inflow, rather as investment than as payment in trade, from outside the Polish economy. This comfortably explains the higher inflation with the higher unemployment rate. The supply is stagnating while money is plenty. There were more employments during the hyperinflation than during the shock therapy. If SMEs in Warsaw are doing well and demand fewer regulations in this situation it is because credit is plenty there, but the source of their capitals is investment from abroad by large. A more freedom is necessary as a matter of course and the government is obviously misallocating resources ‘so far’ to deal with the misallocations as vestiges from previous administrations including the previous regimes, but if you go hasty in budget cuts it could create a higher unemployment rate and a worse overall quality of life. (Cutting red tape is another story as even the Balcerowicz plan could not cut the red tape. This is another issue for the administration to tackle intensely. But, you could not in a political mess). A faster pace of budget cuts could be equal to a shock therapy, but I don’t think that the current economic fundamentals are as bad as just after the communist regime came to an end, when the economy had long been suffering the outcome of Mr Gierek’s debt finance. I believe that today is a time that a softer landing is appropriate. Shock therapy is the last choice, which may makes for another big mess in the politics. Actually, sheer libertarians, who demand a more austerity, have already been leaving from Mr Tusk one by one. Mr Palikot has already established such a libertarian party. (I understand the structure and psychology because a similar phenomenon is taking place in my country). This party is opposite to the PiS in ideology, but I view that such a party could become as dangerous on one side as the populist parties that came into power in 2005 on the other side. All in all, the issue is not choosing between austerity and debauchery, but how you should proceed with austerity, as the austerity is not a single-year programme but a multi-year one. The current debt finance has been an emergency programme to deal with the market fluctuations seen after the worldwide financial crisis broke out. A failure in its exit policy makes for a disastrous situation in the society. (Check out what happened in the 1930s. In my country a finance minister, who had applied an intense austerity as an exit programme to get out of the preceding emergency budgets, was shot dead by military officers who were from poor rural regions, which resulted in the era of wars). I believe that the Tusk administration, a group of moderates, will implement a less spending to revenue in the next few fiscal years unless there is another worldwide financial crisis, but the curve will, and should, make a smoother orbit than you may be demanding.

8:23 pm October 8, 2010

Jan (aka Jasiek) wrote:

@WarsawRules

PS 'rather as investment than as payment in trade' could also be translated as 'rather as external liabilities than as equity capitals'. Note that these liabilities are different from the liabilities on the government's balance sheet. When the financial market fluctuates the former shift en masse to the latter, as the government tries to support the liquidity of the domestic financial market. This is the emergency fiscal policy that the current administration has been adopting for the last couple of years. One should distinguish such a policy from policies taken in an attempt to close the demand-supply gap at a peacetime. The key is to control the capital inflow itself in the first place, which precedes the former kind of debt finance. On the contrary, the latter is what Mr Gierek and most of the boom-time policymakers in the CEE markets (e.g. Latvia and Hungary) implemented in the past.

6:01 am October 10, 2010

Hevelius wrote:

So count me with Palikot then. PO is now is in it's fourth year of government but they still refuse to do anything which might prejudice their chances of winning the next election.

You could sum up the whole of Rostowski's statement in one line: We are cowards so we won't touch KRUS, or Pensions/special privelges of powerful interest groups like Police, Miners, Army, etc, etc.

And small business owners can go to hell because we won't touch all the communist legislation which keeps apparatchiks in cushy civil service non-jobs.

All we can expect from cowardly PO is more populist nonsense which does nothing to address the real issues.

4:28 am October 11, 2010

Eugene Markow wrote:

I lean towards the Balcerowicz style of austerity in taking debt more seriously and acting upon reducing the level more ambitiously via reducing unnecessary spending even where it is a politically delicate matter and may cost potential voter support. Rostowski isn't worried about debt right now due to generous privatization revenues and projected growth in GDP, so he's going to utilize leverage to the near maximum threshold until the inflows begin to diminish.

8:28 am October 11, 2010

Jan (aka Jasiek) wrote:

It appears that the success experience of the previous shock therapy is tempting all you guys here into another one. A shock therapy or a milder method, it is the most important to build a public consensus on the debts in the first place. Without one, a deficit cut would make for a political mess so that a real populist counter-reaction would ruin all the efforts. In other words, your ‘class’ supporting Mr Palikot would certainly drive the more numerous people into desperately supporting Mr Kaczynski. Moderatism is not mediocrity but the sole wisdom.

11:17 am October 11, 2010

Hevelius wrote:

Jan, I don't know which country you live in but I'm pretty sure it's not Poland. Maybe you should come over here some time and see how things really are rather than commenting from somewhere in cyberspace.

There's no chance that Kaczynski's party could win any elections in it's current state - Jaroslaw K has decided to go back into his submarine (or Ark) and enjoy the delights of principled opposition, uncontaminated by any prospect of power. His party is now the Party of Smolensk - they don't talk about anything now except Smolensk and building monuments in every town and city in Poland to the glory of Lech Kaczynski and the Martyrs of Smolensk. Sure their vote amongst the Catholic fringe is secure but no sensible person will go anywhere near them in their current state (they're purging all the moderates to retain ideological purity).

There's no longer any functioning opposition party so this is in fact an ideal opportunity for PO to carry out bold reforms. If they're not willing to do it when the main opposition party decides to remove itself from the political sphere, when will they?

It's better to clean up the mess now and then give the economy a solid base on which to grow for the future rather than have these issues endlessly drag on the economy. Situations like KRUS are just untenable and sticking your head in the sand like an ostrich and wishing it all away won't help.

8:15 pm October 11, 2010

Jan wrote:

@Hevelius

They could. Populism is always strong when people feel that ‘things around me are all worsening’. It is easy to know but hard to feel that the public finance is deteriorating, but when the reforms began the finance of the private sector, or things around them, would get tight for the time being until the gear starts to evolve. I have been concerned and talking about that lag, and it is the very period in which populists regain power. I am not as optimistic of the political scene as you are. Certainly, you said, “no sensible person will go anywhere near them in their current state.” That is right but I am concerned all the more. With a radical austerity Poland could repeat the history of the messy 1990s and probably 2005-2007 as well.

In the country where I live, a political party which had consistently been in power for decades thanks to its determined moderatism. It had three components – moderatists, libertarianists and populists, but the moderatists had always been considerably powerful while populists gained power by splashing money to voters. Immediately after populists, whose guru had failed to obtain the party leadership, parted with the party, libertarians took the initiative chanting ‘the structural reform’. It deregulated everything in anticipation that freedom will activate the economy, but the economy got into the era of a structural deflation. It eased the money to stop the fall of the CPI, but the expanded base money mostly created credits to speculative acts. The deflation is a natural consequence to me, because the combination of deregulation and monetary expansion would allow each existing business, fed with cheaper loans, to enter into others’ markets to saturate all the markets. In that situation it is ridiculous to make efforts to manufacture goods within the economy. It is reasonable to import goods from abroad. Therefore, bankers could still smile as they find businesses in investment banking where they indirectly give credits to productions abroad. Naturally, the labour conditions in the manufacturing sector back home deteriorated with cheaper wages, aggravating and prolonging the structural deflation. (to be continued)

8:23 pm October 11, 2010

Jan wrote:

@Hevelius

(…continued from my previous post) But, as deflation is only a surface monetary phenomenon, the real problem is the structure itself which did not really contribute employment and wage. The expanded money has long been shifting to the public debts. Now, the economy has been in a more serious situation year by year with large outstanding public debts as a result of the libertarians’ reform. The moderates within the party, who are said to have done an in-party coup d’etat against the libertarians, regained the initiative, but voters had already been fed up with the stagnation. Believing that the stagnation was because of insufficient money, they voted for a new party that had been created by populists from the former party, socialists, and much more radical libertarians. The party does not have a written platform. It is certainly a populist party as a whole that can do and become anything to retain power. The cunning populist group took the party initiative to win popularity. They are now pressing a monetary expansion on the central bank to finance the ‘reform’ that they advocate but that has gradually been exposing its theoretical contradictions. The leader of the populists is now in a large political scandal. I predict that many from the populist group will leave the party before long to create a new party with radical libertarians. Contradiction? They could not care less as long as they can win. After all, they are not as much of economists as you are but politicians. They will certainly aggravate the debts. I now only hope that the moderates somehow regain its power to re-start the method of grounded reform.

I believe that the above complications suggest how the Polish policymakers should act. To me, Mr Balcerowicz appears to be a devout academic who, despite his ability to, refuses to accept such political kinetics.

Feel the air of the recent Poland is a good idea indeed in spite of the fact that I visit there from time to time, but I need to stick to seeing Poland from a historical and sociological perspective, to become a better troll if there can be any.

8:29 pm October 11, 2010

Jan wrote:

@Hevelius

P.S. If the finance of the private sector, or things around them, does not get tight when the reforms begins, you need to suspect that a massive capital inflow is taling place, which accumulates Poland's external debts. This is exactly what Mr Marek Belka was the most concerned of when he was at the IMF. Refer to the iMF Direct blog and read his entries on capital inflow.

1:33 am October 12, 2010

Eugene Markow wrote:

> It appears that the success experience of the previous shock therapy is tempting all you guys here into another one.

@Jan: Focusing on debt and prudently cutting out the fat in spending where it is deemed pure bloat doesn't necessarily equate to "shock therapy". There are ways to do it intelligently if all public spending in every category is scrutinized with utmost care. Rostowski doesn't wish to do this right as he favors a more gradual course and bets on a steady cash inflow stream for now. It was much easier for the government to simply declare a VAT rate increase which only focuses on the revenue side, rather than being more ambitious and looking at the expense side. Obviously, accounting wise, there are two sides to the equation, and currently the easy way out is being taken. Remember, there are countries in the West that have been with the capitalistic system for quite a while, with more experienced economists, and just take a look at how many have severe debt issues: Ireland, Spain, Italy, Greece, Iceland, etc. Better to tackle debt now. I must agree with @Hevelius, to truly see (and feel) what is going on here in Poland, it helps to reside in this countryy for a lengthy period of time rather than occasionally visiting it.

Btw, I applaud Balcerowicz's debt clock in Warszawa for the sake of public awareness.

11:00 am October 12, 2010

Jan wrote:

@Eugene Markow

(Please read this post first then the previous one).

You context can be summarised as follows.

1. A fiscal austerity is needed, but is should be milder than the shock therapy
That, I have no objection as I have been writing.

2. The government should cut spending first rather than raise tax
This is the very point that divides you from me. First, draw the equation of the effective demand, consumption and investment. It is:
‘effective demand’ = ‘consumption’ + ‘investment’
Keynes presented this in his ‘General Theory’. Although Keynesianism is quite controversial, this particular equation is just true even today. Now, if the government cuts its spending according to your propose, both the consumption and investment will contract, because the government pay wages for the public sector workers, pensions, etc. and invests into various enterprises. Naturally, the effective demand will contract by that much. As an effective demand decides the scale of employment, a larger scale of unemployment will emerge in that situation. To retain the level of employment for the short term, there are only two ways for the policymakers to take – either ease money or allow a more capital inflow. In my previous post I have already talked about how a monetary easing, if implemented in such a case, affects the economy. Mr Marek Belka opposes a significant easing for that purpose. As for the capital inflow, Mr Belka has long been warning already. When I posted my previous comment, I did not know he had an interview with WSJ recently and I found and read the article and blog entry just a short time ago today. Search on WSJ:
‘A Caution Against Currency Devaluations’
‘Poland’s Central Bank Governor Belka on Currency Wars’
(to be continued…)

11:07 am October 12, 2010

Jan wrote:

@Eugene Markow

You context can be summarised as follows.

1. A fiscal austerity is needed, but is should be milder than the shock therapy
That, I have no objection as you see I have been writing.

2. The government should cut spending first rather than raise tax
This is the very point that divides you from me. First, draw the equation of the effective demand, consumption and investment. It is:
'effective demand' = 'consumption' + 'investment' (i.e. D=D1+D2)
Keynes presented this simple equation in his ‘General Theory’. Although Keynesianism is quite controversial, this particular equation is just true even today. Now, if the government cuts its spending according to your propose, both the consumption and investment will contract, because the government pay wages for the public sector workers, pensions, etc. and invests into various enterprises. Naturally, the effective demand will contract by that much. As an effective demand decides the scale of employment, a larger scale of unemployment will emerge in that situation. To retain the level of employment for the short term, there are only two ways for the policymakers to take – either ease money or allow a more capital inflow. In my previous post I have already talked about how a monetary easing, if implemented in such a case, affects the economy. Mr Marek Belka opposes a significant easing for that purpose. As for the capital inflow, Mr Belka has long been warning already. When I posted my previous comment, I did not know he had an interview with WSJ and I found and read the article and blog entry just a short time ago today:
‘A Caution Against Currency Devaluations’http://online.wsj.com/article/SB10001424052748704442404575542264033319420.html?mod=WSJ_hps_MIDDLESecondNews
‘Poland’s Central Bank Governor Belka on Currency Wars’http://blogs.wsj.com/economics/2010/10/09/polands-central-bank-governor-belka-on-currency-wars/
(to be continued…)

11:08 am October 12, 2010

Jan wrote:

(…continued)
So, other than me, at least Mr Belka is also against your opinion. Although he does not get any further in public as he works as a central banker, I would explicitly propose a legislation of tax raise first to secure a certain level or channel of revenue to retain a certain level of its public consumption and investment. Indirect tax tends to be less affected by business conditions than direct tax does. That is why it is VAT that is first to consider. When the legislation is feasible, a ‘mild’ spending cut projects should be implemented second. It would be like putting the cart before the horse if you cut spending first, because the economy would have been suffering from a smaller effective demand by the time the government tried a tax raise to retain its revenue; the people would oppose the tax raise more fiercely to topple the reform. A tax raise should be implemented when the economy is still growing well. It is too late when the economy has begun stagnating. The new tax revenue, via public investment, will prevent what Mr Belka calls portfolio capital inflow by that much to leave rooms for further fiscal and monetary policies.

11:13 am October 12, 2010

Anonymous wrote:

@Eugene Markow

Something is wrong with the system. Please neglect "(Please read this post first then the previous one)." Thanks.

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